Skip to content

CBO Report Shows Increased Wages for Lowest Earners

3 min readBy: Curtis S. Dubay

In a just released paper, “Changes in Low-Wage Labor Markets Between 1979 and 2005,” the Congressional Budget Office finds that since 1990, real hourly wage rates at the bottom of the distribution have increased substantially— slightly more than the typical wage rate. This finding flies in the face of those who have endlessly reiterated incorrectly that wages are not growing and are actually falling.

Further findings from CBO’s report:

-Notwithstanding an overall widening in the distribution of wage rates over the past quarter century, all of the widening in the lower half of the hourly wage distribution occurred in the 1980s. Since 1990, real hourly wage rates at the bottom of the distribution have increased substantially—slightly more than the typical wage rate.

-The changes in the distribution of wage rates since 1979 appear to be the result of changes in the premiums paid by employers for skills and attributes beyond those associated with a worker’s education or experience. Those abilities may include motivation or problem-solving skills, for example––that is, traits that employers reward but that are not measured in survey data. A portion of the changes in the 1980s also may be accounted for by factors such as the decline in union coverage and the falling real value of the minimum wage.

-Large percentages of workers in low-wage jobs have little education or are young. However, throughout the past quarter century, the education levels and ages of workers in low-wage jobs have been increasing, as have those of the workforce as a whole.

– The median household income (pretaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and including cash transfers such as welfare) of workers earning low hourly wage rates fell in real terms between 1979 and 1990 but rose between 1990 and 2005. In both periods, decreases in the number of workers in the household reduced household income. But in the latter period, increases in the number of hours worked by low-wage earners along with increases in real hourly wage rates more than offset that decline. While the data used for hourly wage rates are of high quality and come from a large nationally representative survey collected by the U.S. Census Bureau, they do not include other forms of compensation such as pensions and health insurance. Moreover, the measures of annual wage and salary earnings and of pretax household income used in this analysis do not include the value of Medicaid, food stamps, other in- kind transfers, nor payments through the state and federal tax systems such as the earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. .

The CBO’s findings should help put to rest the notion that the poor are getting poorer. In fact, CBO’s analysis does not even include the value of Medicaid, food stamps or other forms of transfer payments the poor often receive that increase their standard of living.

It is important to keep in mind, as the debate about income disparity is sure to continue, that there is not a tax policy prescription for all perceived economic problems. Returns to education have increased recently due in part to increases in technology. The government cannot change this through the tax code, or in any way for that matter, because it is a market-based reality.

The only way the government can help those with less education is by creating programs to get them more education so they can share in the increased returns. Hopefully lawmakers understand this, or our already beleaguered tax code is sure to be made even more complex.